Researcher, many investors get lulled to sleep assuming that big NOLs will shield a company from paying taxes for years to come. This isn't what happens, from what I've seen. First, companies with NOLs often pay signficantly less in state and federal taxes than what is shown on their income statement. The true measure of taxes paid shows up on the cash flow statement.....the true benefit of the NOL is felt there.
Two, a company can have a huge NOL carryforward that appears to cover pretax profits for several years in the future, but still have to show taxes on the income statement. Why? Because the NOL carryforward has to be recognized as an asset, brought on to the balance sheet, and then offset gradually through the imposition of taxes on the income statement. Bobwins, didn't we have a discussion of this situation a while back?? Wish I could remember the stock, but I remember going through the accounting and it made sense.....do you remember?
I believe that companies and their accounting firms are supposed to determine the point at which future profits from operations can be used to offset the tax benefits/nols. If they can assume that stable operations will most likely result in the full use of the NOL carryforwards, then they are obligated to recognize them as income and bring them on to the balance sheet as an asset. NOLs are not carried on the BS.
I can give you one example off the top of my head:
IIG (Imergent)
"Income Taxes
In preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating current tax liabilities together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities. Our deferred tax assets consist primarily of the future benefit of net operating losses carried forward. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered historical operations and current earnings trends, future market growth, forecasted earnings, estimated future taxable income, the mix of earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, the previously provided valuation allowance, if any, would be reversed.
At June 30, 2003 we had recognized a tax valuation allowance of $19.3 million against our deferred tax assets. As of March 31, 2004, we determined that it was more likely than not that $16.7 million, or all but approximately $2.6 million of the deferred tax assets would be realized. This determination was based on current projections of future taxable income when taking into consideration limitations on the utilization of net operating loss carry forwards ("NOL") imposed by Section 382 of the Internal Revenue Code ("Section 382").
-IIG's last 10K
Perhaps we have some accountants lurking out there who can shed some light on this.
